The Norwegian town of Kirkenes, on the far northern border with Russia, is on
the cusp of becoming an oil boom town. But, asks Colin Freeman, will
the world play fair for the Arctic's spoils?

In his shipping agency overlooking the chilly harbour waters at Kirkenes in northern Norway, Arve Henriksen draws a finger down the long, red-inked line on his desk map. Stretching up through the icy Barents Sea, it marks what may be one of the world's last great territorial carve ups: an agreement between Norway and Russia, struck last year after 40 years of squabbling, over where each country has rights to hunt for vast oil and gas deposits.

To the 10,000 residents of Kirkenes, who are on the cusp of becoming a boom town, it's known politely as the "demarcation line". To the rest of the world, which is watching closely and enviously, it's a flying start in the "Scramble for the Arctic", where a quarter of world's dwindling fuel reserves are now thought to lie.

"Kirkenes' future is certainly bright," said Mr Henriksen, 45, who, in a previous career, ran Kirkenes' only record shop owner and put on the world's northernmost blues festival. He switched to the more lucrative business of shipping 13 years ago, and having started out revamping old Soviet-era Russian trawlers, now gets 50 per cent of his trade from equipping seismic exploration vessels.

"Soon all my business will be oil and gas related, and if the possibilities thrown up by the demarcation line develop properly, we'll need to find some big partners," he added. "What we are doing now is Micky Mouse stuff - everybody is looking for a piece of the pie, and some of the big guns are coming."

Indeed, in the literal sense, the big guns are already here. Lying less than seven miles from the Russian frontier, Kirkenes was one of Europe's most-heavily militarised areas during the Cold War; the nearest Russian nuclear weapons base is only 35 miles away, and offshore lurks some two-thirds of the Russian fleet, including atomic submarines. Adding to that, the Kremlin is now planning to install ten joint naval and sea rescue bases along its north coast, to back its plan for exploring the entire Arctic Ocean. Or, as a Moscow-based think-tank last month called for it to be renamed, the "Russian Ocean".

Such rhetoric is dismissed as mere posturing by the Arctic's other principal claimants, namely the US, Canada and Denmark, which owns Greenland. It may nonetheless, however, be the opening shots in what has been dubbed the "Ultra Cold War" - the jostle for control of the entire north Polar region, in which energy-hungry giants like China also want to contend, despite being thousands of miles away.

For the melting of the ice cap will free up not just untapped reserves of fuel, minerals and fish, but an entire new world trade route. This summer, the North East Passage along Russia's northern coast line is expected to be ice-free for a record three months, and in 20 years time it may be open year-round, an alternative to the Suez Canal that would cut 4,000 miles off from a Shanghai-Europe journey.

Nowhere do such changes loom larger than in Kirkenes, a cluster of workmanlike weatherboard houses centred round a tiny high street where restaurants sell whale carpaccio and reindeer stew. Bound for six months by permanent snow and two months by permanent night, its deep water harbour is ice-free year-round thanks to the Gulf Stream, giving it "Pole position", as the local council's PR blurb jokes, for exploration northwards. Already, specialist Arctic oil and shipping firms are setting up, while 1,000 extra homes are being built in expectation of a 20 per cent population growth.

At present the oil and gas fields further north are still largely at the exploration stage, and the high cost of operating in such extreme conditions will mean that many reserves will not prove economically viable if global energy prices drop. But everyone expects rich pickings, with predictions of up to 13 per cent of the world's untapped oil reserves and 30 per cent of its gas reserves. Publishing early seismic survey graphs last year, Bente Nyland, the normally sombre geologist who heads the Norwegian Petroleum Directorate, remarked: "this sort of thing puts stars in geologists' eyes".

What is most striking in Kirkenes, though, is the way Russia is treated a partner rather than a rival. Uniquely in Norway, and probably the rest of Europe, signs in streets and shops are in both Latin and Cyrillic script, while a special Schengen-style visa-free regime operates for residents in the immediate area either side of the border. Many locals have a Russian colleague or drinking pal these days, and Kirkenes' nickname is "Little Murmansk", in honour of the major Russian port further east.

"Russia is a complex neighbour, with many things wrong with its government, but what can a country our size do except co-operate?" said Rune Rafaelson, head of the Kirkenes-based Norwegian Barents Secretariat, which promotes cooperation among Arctic nations. "We don't lecture the Russians about democracy, instead we just show them our way of doing things, and if they like it, fine."

Last year's demarcation line agreement validated that approach, he says: the Russians eventually came to the table partly because they needed Norwegian expertise to develop their oil fields, creating a win-win situation for Norway. As Mikhail Noskov, the Russian consul to Kirkenes, put it in an interview with The Sunday Telegraph, it was a "good example" of how Moscow and Europe could co-operate.

Then again, it may equally be a one-off, given that Kirkenes has always enjoyed a historically close relationship with Russia. The Red Army liberated it from the Nazis in the Second World War, and when Stalin died in 1953, some people wept. More recently, when Kirkenes' iron ore mine shut down in the mid-1990s, it was trade with Russia's newly-emerging market economy that kept the town afloat, binding Russians and Norwegians together again.

"Many countries have been trying to work successfully with Russia, but only the Norwegians have done so," observed Cleo Paskal, a geostrategist at London's Chatham House think-tank. "However, it's based a lot on the personal trust that the Norwegians have built up, and I doubt it can be replicated elsewhere.'"

Indeed, some of Kirkenes' other passing port trade shows evidence of more avaricious national instincts at work. Earlier this month, two Russian seismic vessels left the harbour on a two-month journey to map out data proving a geological link between the Russian mainland and the North Pole, something that would support the Kremlin's claim to energy rights there. The week before, from the Norwegian island of Svalbard, a Danish vessel headed off to do the exactly same thing in Denmark's name.

Both countries will submissions in the next couple of years to the United Nations Commission on the Limits of the Continental Shelf, a New York-based body of geologists from UN member states. But it has no adjudicatory role in the event of disputes, which means that ultimately, it will be old-fashioned diplomacy - and possibly power play - that will prevail.

Mindful of the stakes involved, different nations are getting increasingly touchy about each other's aspirations. Canada, for example, accused Moscow of a "15th century" approach to land claims when a Russian submarine planted a titanium flag beneath the North Pole in 2007. Yet Canada's own Arctic publicity stunts have sometimes backfired too: when a Canadian immigration minister held a mock citizenship ceremony for Santa Claus two years ago, it was seen elsewhere as a tacit message that Santa's North Pole home was Canadian territory.

Even mild-mannered Norway has been involved in a stand-off with China over access to the Arctic, sparked by Beijing's anger at the award of the 2010 Nobel Peace Prize to the jailed Chinese pro-democracy activist Liu Xiaobo.

In retaliation, the Norwegian government is reported to have privately considered blocking China's application for permanent observer status on the Arctic Council, an eight-country regional forum.

China has already made its interest in the Arctic clear: three weeks ago its only icebreaker, "Snow Dragon", completed its first-ever research trip through the Northern Sea Route. Yet the fact Beijing has no realistic territorial claim there may not stop it seeing the Arctic as its own backyard, according to Ms Paskal. What Moscow wants to rename as the "Russian Ocean", Beijing may opt to term the "northern Pacific".

"China is an expanding maritime power, and has already shown a 'might is right' policy in the South China Sea," she said, referring to recent military stand-offs with Vietnam over the Spratly Islands. "Potential for conflict in the Arctic is probably limited, but it may lead to a fundamental shift in world geostrategy. For centuries, northern Russia has been seen as a wall. Now it's going to be a highway, which opens up all kinds of new threats."

Meanwhile, the citizens of Kirkenes will fly what may be an increasingly lonely flag for pan-Arctic harmony, with men like Mr Henriksen, the shipping agent, convinced there is nothing to fear from an ever-tightening Russian bear hug. Back in the 1990s, when he first spent time in Murmansk, he saw much "crazy" stuff, he said, with Mafia hits on people he worked with. Today, many of those same people are trusted business associates, now sharing alongside him in the Arctic goldrush.

"The important thing is just to get to know Russians well," he said. "If they don't trust you, you can never explain to them the concept of 'win-win'. They'll think it's the name of a city in China."